All values in the economic system are measured in terms of money. Our goods and services are sold for money, and that money is in turn exchanged for other goods and services. Coins are adequate for small transactions, while paper notes are used for general business. There is additionally a wider sense of the word ‘money’, covering anything, which is used as a means of exchange, whatever form it may take. Originally, a valuable metal (gold, silver or copper) served as a constant store of value, and even today the American dollar is technically ‘backed’ by the store of gold which the US government maintains. Because gold has been universally regarded as a very valuable metal, national currencies were for many years judged in terms of the so-called ‘gold standard’.
Nowadays however valuable metal has generally been replaced by paper notes. National currencies are considered to be as strong as the national economies, which support them. Paper notes are issued by governments and authorized banks, and are known as ‘legal tender’. Other arrangements such as cheques and money orders are not legal tender. They perform the function of substitute money and are know as 'instruments of credit.' Credit is offered only when creditors believe that they have a good chance of obtaining legal tender when they present such instruments at a bank or other authorized institution. If a man's assets are know to be considerable, then his credit will be good. If his assets are in doubt, then it may be difficult for him to obtain large sums of credit or even to pay for goods with a cheque.
The value of money is basically its value as a medium of exchange, or as
economists put it, its ‘purchasing power’. This purchasing power is dependent on supply and demand. The demand for money is reckonable as the quantity needed to effect business transaction. An increase in business requires an increase in the amount of money coming into general circulation. But the demand for money is related not only to the quantity of business but also to the rapidity with which the business is done. The supply of money, on the other hand, is the actual amount in notes and coins available for business purposes. If too much money is available, its value decreases, and it does not buy as much as it did, say five years earlier. Thisconditionisknownas ‘inflation’.